02 The Small Business Handbook Second Edition S

CHAPTER 2BUSINESSMODELS 23MARKET RESEARCH

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BUSINESSMODELS “Over the course of my career, I’ve come to see business model innovation not as a static process, but as a systemic, repeatable and reliable capability, one that leaders need to build, strengthen and eventually turn into a sustainable competitive advantage.” - A.G. LafleyWHAT IS A BUSINESS MODEL?A business model is the “blue print” of your business. It tells us how a business / organisation creates,delivers and captures value. In simple terms, it tells us how your business makes money from theservices or products it provides to its clients.WHY IS THIS IMPORTANT?Too often business owners just start a business without taking the time to map out each businessarea that will allow them to run and operate a successful business. By working out a business model,you are forced to focus on creating a product that meets your customers’ needs, revenue strategies,costs, margins, distribution strategies etc. If done properly, it will reduce the chance of failure.KEY COMPONENTS OF A BUSINESS MODELIn its most simplified format, a business model is made up of Four Key Elements. These are: 1 Customer Value Proposition: This looks at how your product or service effectively meets the needs of customers or provides solutions for them. 2 Financials: This looks at elements such as cost structure, revenue generation, profitability and margins as generated by your business’s service or product. 3 Resources: This looks at the resources required by the business to effectively deliver its product or service. For example, this would include funding, having staff with the right skills, key assets and technology, etc. 4 Processes: This looks at recurring processes that are critical to the functioning of the business, such as HR, IT, Manufacturing, Sourcing, Recruitment, Logistics, Sales, Planning, etc. Processes are crucial as they determine how well your business delivers its products and services to the client. 25MARKET RESEARCH

Content adapted from The Four-box Business Model in the book “Seizing the white space” - Mark W. JohnsonRECOMMENDED BUSINESS MODEL TOOL TO USE:Business Model Generation by Osterwalder, Pigneur et al, 2012There are a number of business model tools to use. We recommend using the following tool: “The BusinessModel Canvas” as it is detailed and provides you with a template, as well as questions to guide and assist youto develop and map out your business model.WHAT IS IT?The Business Model Canvas is a strategic management and entrepreneurial tool. It allows you to describe,design, challenge, invent, and pivot your business model. (Strategyzer.com, online)There is also the Value Proposition Canvas – created by the same authors. This tool was created to make youthink about the value you are creating for your customers in the products and services you design.WHY ARE WE RECOMMENDING THESE?These are tools which allow you to visualise and map out your business model.Online resources:• http://www.businessmodelgeneration.com/canvas/bmc• http://www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf 26 MARKET RESEARCH

BUSINESSMODELSInfographic is adapted from the Business Model Canvas created by Osterwalder and Pigneur.For more information go to: www.strategyzer.com VALUE CUSTOMER KEY COSTPROPOSITIONS RELATIONSHIPS RESOURCES STRUCTURE 1 3 9 REVENUE 7 STREAMS CUSTOMER CHANNELS KEY KEY SEGMENTS 5 ACTIVITIES PARTNERS 4 2 6 8 27MARKET RESEARCH

TIPS ON CREATING A BUSINESS MODEL FOR YOUR BUSINESS... 1 It starts with really knowing your customers and creating products and services that meet their needs. 2 Look at different business models in various Industries – get ideas on what they are doing well that you could also use in your business model. 3 Understand the trends in the market – business, digital, social and economic trends. 4 Take these trends and different models, mix them up and find the right solution for your business / service or product! 5 You won’t get it right the first time around. Therefore you need to test and rework the model. 6 Use tools like the ‘business model canvas’ or ‘the four-box business model’ to help you properly map out your business model 7 Business models are not static, you should innovate your business model for sustainability, remaining relevant and maintaining a competitive edge. 8 Don’t create the model by yourself. Work with your team to create a model. If you are alone in your business, ask for help or feedback from others. 28 MARKET RESEARCH

BUSINESSMODELSEXAMPLES OF BUSINESS (REVENUE) MODELSIn our tips on “How to create a business model” we suggested that you look at models used by otherbusinesses and in different industries than yours. To assist you with this, we have compiled thefollowing examples. We hope that the simplistic overview of the following models will inspire you todo more research on business models. Hopefully you will find just the right model that will allow youto maximise the value of your business. The modle Purpose/ value of the modle Some practical examplesFree for the user model This model is strategic. The word “free” Some online services give you a 14 day or 1 monthor a freemium model means that you won’t be making any trial period and then charge you thereafter if you money! So why would a company use choose to continue using the service. this model? E.g. Netflix, Sage Accounting SurveyMonkey, an online research tool, offers a free basic membership with minimal features. For additional value, i.e. if you want access to additional features, you can upgrade to the Select, Gold or Platinum models which all come at a fee. Music streaming sites like Spotify. You can stream music for free online but if you want music on your device when you are offline, you need to pay the monthly subscription.Direct sale model This is the traditional model we see in Traditional model where the user pays for a almost every business practice, where service or product the consumer pays for the product or Prepaid airtime / electricity – used by services s/he buys. municipalities and telecommunication There are a number of variations in companies this model which have been created Cloud services – you only pay for the storage to meet the needs of different space you use. customers: For example: • Upfront payment for a service which will be used later. • Pay as you use or go models 29MARKET RESEARCH

Advertising model This is when a company that provides a Google – The use of the search engine is freeMatchmaking/ service to two or more customer groups to all, but advertisers/businesses pay Google toBrokerage models gets paid by one party whilst another advertise on the platform.Subsidised models party benefits from the service for free. Facebook & Twitter – also use Advertising models. This is also known as a third party model Radio – listeners don’t pay to listen to radio – as the user does not pay but a third stations, radio stations make money from selling party does. advertisements and any special events they may organise. Think of this as there being a middleman Dating Services – Both users pay the dating site, who facilitates a transaction or deal, or or in real life a matchmaker, in order to meet links a customer to a service provider. someone. This could be a person facilitating, or an Airbnb – an online accommodation facilitator. It online system providing the service. makes money by charging service fees to hosts and guests alike. Paypal (online payment system) – this payment service facilitates payments between the buyer and the seller. It makes money from the commission on the transaction. This is when one part of a product is Gillette introduced the famous razor-blade model, sold at cost or for lower margins – while where the handle is affordable and can be used any add-ons are quite expensive. The over and over again. The user has to buy a blade business makes its money on the to use with the handle. The blades need to be add-ons. constantly replaced, and they are very pricey. Nespresso coffee uses the same model. Car add-ons: Car manufacturers have a “basic” model and the consumer pays additional extras to “customise” the car to their need i.e. such as metallic paint or a sunroof. 30 MARKET RESEARCH

BUSINESSMODELS The modle Purpose/ value of the modle Some practical examplesSubscription model With this model a customer pays a flat Businesses which use this model are: fee over a regular period Newspapers and Magazines. This works for both (monthly / yearly) in order to get access the physical and online products. Users receive the to a business’s product or service. new editions on a daily / monthly basis. The value for the customer is Online business systems – for example Sage convenience – they don’t have to reorder Accounting charges businesses a monthly every month and the flat fees allows subscription for the use of and access to the them to manage their budget. accounting/bookkeeping system. The value for the business is the Music or TV streaming services – for example recurring sales and predictable revenue Netflix and Spotify. The fee is deducted monthly which are a plus for their cash flow. and the user gets continuous, uninterrupted access to these sites.Franchising modle This model, popular in the restaurant Examples of franchises: industry, is when a business owner (franchisee) buys a successful business KFC, Steers – Fast Food model and brand. Vida e Caffé – Coffee Shop The franchisee would “buy” the Specsavers – Optometry franchise upfront and then continue to Kumon, Kip McGrath – Education pay a royalty fee on a regular basis to the DIY Depot, Mica – Hardware stores franchisor. The franchisor assists with branding and marketing support. This is a good model for a business looking to expand. 31MARKET RESEARCH

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